Aon Retirement and Investment Blog

Weekly Update - 13 August 2018

August 13, 2018

MARKET MOVES (Week ending August 12, 2018)

Equities

Global equity markets edged lower over the week as trade tensions between the US and China continued to escalate, with both countries imposing 25% tariffs on US$16bn worth of goods. Elsewhere, the Turkish Lira depreciated by 18.5% over the week as comments from the Turkish President and fears over the high level of foreign denominated debt in the Turkish banking system spooked markets. This was compounded by the US President's announcement of a doubling of steel and aluminum tariffs on Turkish imports on Friday. Market concerns spread into Europe as investors worried about European banks' exposure to Turkey. The S&P 500 Index fell by 0.2% over the week, outperforming the MSCI World Index, which fell by 0.6%. On a year-to-date basis, the S&P 500 Index has outperformed the MSCI World Index (7.2% vs. 3.4%).

US Large Cap stocks underperformed Small Cap stocks over the week as the S&P 500 Index fell by 0.2% while the Russell 2000 Index rose by 0.8%. On a year-to-date basis, the Russell 2000 Index has outperformed the S&P 500 Index (10.6% vs. 7.2%). Growth stocks outperformed Value stocks over the week as growth stocks rose by 0.4% whilst value stocks fell by 0.7%, as measured by the MSCI USA Growth and Value Indices. On a year-to-date basis, Growth stocks have outperformed Value stocks (13.2% vs. 1.6%).

Bonds

The 10-year US treasury yield fell by 9bps to 2.86% and the 30-year US treasury yield fell by 7bps to 3.02%. The 20-year TIPS yield fell by 4bps to 0.86% and the 20-year breakeven fell by 3bps to 2.10%.

The spread of the Bloomberg Barclays Capital Long Credit Index over the yield on US treasuries rose by 5bps to 162bps and the Bank of America Merrill Lynch US Corporate Index credit spread rose by 3bps to 118bps. The US high yield bond spread over US treasury yields rose by 7bps to 350bps and the spread of USD denominated EM debt over US treasury yields rose by 30bps to 363bps over the week.

Commodities

The S&P GSCI fell by 0.8% in USD terms over the week. The energy sector fell by 0.5% as the price of WTI crude oil declined 1.3% to US$68/BBL with US crude oil inventories staying at higher levels than expected. Industrial metals rose by 1.1% despite copper prices falling by 0.8% to US$6,120/MT. Agricultural prices fell by 2.7% and gold prices fell by 0.2% to US$1,214/ounce.

Currencies

Over the week, the US dollar strengthened against all major currencies except against the Japanese yen. The US dollar appreciated by 1.9% against sterling, ending the week at $1.28/£. The US dollar appreciated by 1.4% against the euro, finishing the week at $1.14/€. The US dollar depreciated by 0.4% against the Japanese yen, ending the week at ¥110.72/$. The US dollar appreciated by 0.8% against the Canadian dollar over the week to close at C$1.31/$.

Economic Releases

Inflationary pressures continued to build in the US. Headline consumer price inflation remained at 2.9% as expected but core inflation, which excludes fresh food and energy, rose at its fastest pace since September 2008. The core Consumer Price Index increased by 2.4% over the year to July 2018, above expectations of a 2.3% increase. Wages, however, have failed to keep up with the pace of inflation with the annual change in real average hourly earnings turning negative over July. Growth in real wages slipped by 0.2% from June's flat reading. Meanwhile, US consumer debt rose less than expected at only $10.2bn over June; less than the forecasted $15.0bn and previous reading of $24.3bn.

In the Eurozone, the Sentix investor confidence index came in above market expectations, increasing by 2.6 points to 14.7 in August, but remains below levels seen in 2017 and its recent high of 31.9 in February. However, news from Germany was less positive with industrial production declining by 0.9% in June, below market expectations of a 0.5% decline and the 2.4% increase in May. The decline in production occurred across consumer (-1.6%), capital (-0.6%) and intermediate (-0.8%) goods. German factory orders also came in well below market expectations, falling 4% in June against expectations of a 0.4% fall, due to falling foreign demand (-4.7%) and domestic orders (-2.8%) – the sharpest decline in factory orders since January 2017.

Japan avoided a technical recession in Q2 2018 with preliminary numbers showing that the economy rebounded by an annualised 1.9%, beating the forecasted growth of 1.4%. Japan’s current account surplus narrowed to ¥1175.6bn in the year to June, below forecasts of ¥1222.2bn. Labour markets continued to improve as labour cash earnings accelerated by 3.6% for the year to June from the previous 2.1% increase. Real wages rose at its fastest pace in more than 21 years as it increased by 2.8% over the same period from a previous 1.3% increase, and above a forecasted increase of 0.9%. The rise in real wages was driven by an increase in summer bonuses.

In China, the consumer price index increased by 2.1% over the year to July; 0.2% higher than the previous month and beating consensus estimates of a 2.0% increase. Against a backdrop of tense trade talks, exports and imports grew by 12.2% and 27.3% respectively over the year to July. The sharp rise in Chinese import growth compared to that of exports, led to a narrowing of China's trade surplus to US$28.05bn, well below analyst forecasts of US$38.92bn.

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